tag:blogger.com,1999:blog-21417094647194390322024-03-14T01:20:27.201-07:00Intelligent InvestingTerry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.comBlogger117125tag:blogger.com,1999:blog-2141709464719439032.post-72099908672171566732012-02-22T13:30:00.000-08:002012-02-22T13:46:14.533-08:00Many Active Managers Follow Index<p class="MsoNormal">According to an article in <u>Financial Planning</u> online, active managers do not add significant value. The article sites a study by Sharath Sury, executive director of the Institute for Financial Innovation & Risk Management and an adjunct Professor of Economics at the University of California, Santa Cruz. Sury found that active managers have broad market exposures that cause their funds to look similar to indexes. Unfortunately, active managers charge more than index funds. </p> <p class="MsoNormal">Interestingly, one of the reasons that active managers fail to deliver value is that they charge more. </p> <p class="MsoNormal">Here's the link to the article: <a href="http://www.financial-planning.com/news/value-of-actively-managed-mutual-hedge-funds-investors-2677447-1.html?ET=financialplanning:e5922:1872689a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=FP_Daily__022212">Active Managers Don't Add Value: Study</a></p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com2tag:blogger.com,1999:blog-2141709464719439032.post-85347227407010923582012-02-21T15:50:00.000-08:002012-02-21T15:54:30.340-08:00Small Caps Rise<p class="MsoNormal">The Russell 2000 index of small capitalization stocks has risen 36% since early October, according to <u>The Wall Street Journal</u>. The index is just 4.2% below the all time high of 865.29. </p> <p class="MsoNormal">I find this particularly amazing, given that investors have pulled money from U.S. small cap mutual funds in 37 of the past 40 weeks, according to EPFR Global.</p> <p class="MsoNormal"><span style="font-size: 100%; ">Intelligent investors understand the small cap stocks, both domestic and international, belong in a low cost, passive portfolio.</span><span style="font-size: 100%; "> </span><span style="font-size: 100%; ">They are long term investors and do not move tactically from asset class to asset class.</span></p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-14362468277654077342012-02-14T10:48:00.000-08:002012-02-14T10:49:03.240-08:00Investors Zig and the Market Zags<p class="MsoNormal">Investors pulled $2.8 billion from US stock funds in January, according to Morningstar. Investors were likely reacting to the poor results turned in by equities in 2011. </p> <p class="MsoNormal">But the spurned market responded by turning in its best result for the month of January in 15 years. The Dow Jones Industrial Average rose 3.4% and the Standard & Poor's 400 gained 4.4% in January.</p> <p class="MsoNormal">The lesson? Investors need to learn to remain steadfast. Successful investing does not require timing in and out of the market. Rather, successful investors develop an appropriate investment approach and remain committed to it.</p> <p class="MsoNormal">Happy Valentine's Day</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-37768585041049835872012-01-26T17:35:00.000-08:002012-01-26T17:38:39.033-08:00Two Standards<p class="MsoNormal">The Dodd-Frank Act (Wall Street Reform and Consumers Protection Act) was passed in the summer of 2010 in the aftermath of the global financial crisis. The bill required the Securities and Exchange Commission (SEC) to conduct a study of the standards under which investment advisors and broker-dealers provide investment advice. </p> <p class="MsoNormal">The problem is that broker-dealers and investment advisors operate under different regulatory regimes and are subject to different legal standards. In its executive summary, the SEC notes that "retail investors are generally not aware of these differences or their legal implications." <a href="http://www.sec.gov/news/studies/2011/913studyfinal.pdf">http://www.sec.gov/news/studies/2011/913studyfinal.pdf</a></p> <p class="MsoNormal">Here's the issue:</p> <p class="MsoNormal">Investment advisors are held to a fiduciary standard of care. They must, by law, serve the best interests of their clients. If a conflict arises between their interests and those of their clients, they must subordinate their interests to those of their clients.</p> <p class="MsoNormal">Broker-dealers are held to a suitability standard of care. This standard requires broker-dealers to make recommendations that are consistent with the interests of their customers. Notice that this standard does not require broker-dealers to serve the best of their clients.</p> <p class="MsoNormal">This week The Wall Street Journal provided an update on the battle over these standards: <span style="font-family: Calibri, sans-serif; font-size: 11pt; "><a href="http://online.wsj.com/article/SB10001424052970204301404577171112474127468.html">http://online.wsj.com/article/SB10001424052970204301404577171112474127468.html</a></span></p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-65990968194279659382012-01-24T13:57:00.000-08:002012-01-24T13:58:15.472-08:00Actively Managed Mutual Funds<p class="MsoNormal">According to Morningstar, investors pulled $8.6 billion from actively managed mutual funds in 2011. They invested $76 billion into index funds and $121 billion into exchanged traded funds, most of which are passive.</p> <p class="MsoNormal">Perhaps investors are really beginning to wake up to the fact that actively managed mutual funds consistently underperform their benchmarks. While there will always be funds that do outperform, it is impossible for an investor to know, in advance, which funds will.</p> <p class="MsoNormal">Investors cannot control the market. But they can control how much they pay to be in the market. Intelligent Investors practice low cost, passive investing, because it allows them to capture the returns of the markets with very little cost. </p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-29948389441428607252012-01-07T15:11:00.000-08:002012-01-07T15:14:08.144-08:00Burton Malkiel on 2012<p class="MsoNoSpacing">As I review the performance of various asset classes in 2011, it is rather clear that the investment markets continue to struggle with the effects of the global financial crisis. There are very few asset classes that performed will last year.</p> <p class="MsoNoSpacing">I have read several books on the history of economic crises and the impact such crises have on the financial markets. The correlation between asset classes converges and there are often few places for investors to hide. Unfortunately, last year was no exception to this phenomenon. </p> <p class="MsoNoSpacing">Most investors have undoubtedly grown weary of watching their portfolios languish. The past several years, starting in the fall of 2007, have not been kind to investors.</p> <p class="MsoNoSpacing">I know from my self-directed reading that eventually crises end and asset classes begin to follow a more normal pattern of returns. However, the current economic crisis in Europe (and the United States) is rather acute and the deleveraging process that must precede market recovery will quite likely take longer than most expected and hoped.</p> <p class="MsoNoSpacing">The fundamentals of investing have not changed: proper asset allocation, diversification, low costs and systematic rebalancing. You might find this article by Professor Burton Malkiel in <u>The Wall Street Journal </u>reassuring, "<a href="http://online.wsj.com/article/SB10001424052970203462304577134772867322582.html?KEYWORDS=where+to+put+your+money">Where to Put Your Money in 2012</a>." Professor Malkiel and Richard Ellis co-authored <a href="http://www.google.com/products/catalog?hl=en&cp=17&gs_id=w&xhr=t&q=the+elements+of+investing&qscrl=1&nord=1&rlz=1T4ADRA_enUS415US416&biw=1024&bih=615&gs_upl=&bav=on.2,or.r_gc.r_pw.,cf.osb&ion=1&wrapid=tljp1325869150362034&um=1&ie=UTF-8&tbm=shop&cid=1203156">The Elements of Investing</a>, which I highly recommend.</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-59918240018659563582011-12-22T14:36:00.000-08:002011-12-22T14:37:13.329-08:00Measuring Investor RiskI have used FinaMetrica's investor risk profile for several years to attempt to assess clients' ability to accept risk. FinaMetrica's found, Geoff Davey, was recently featured in an online interview I viewed. Davey identified three distinct forms of risk that investors confront.<div><br />Required risk measures the extent to which investors must expose themselves to market volatility and losses in effort to receive the returns they need to achieve their goals. We can use standard deviation as a means of measuring this risk.</div><div><br />Risk capacity refers to the investors' ability to accept losses. If an investor has a $10 million portfolio, a $50,000 loss is not a big deal. The loss is just ½ of 1%. An investor with a $500,000 portfolio would have lost 10%. A very big deal.</div><div><br />Risk tolerance is a psychological construct. It's a personality trait. It's what FinaMetrica measures with their profile.</div><div><br />When I write an investment policy statement for a client, I refer to all three kinds or risk.<br /></div>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-8331294272830293422011-12-18T15:23:00.000-08:002011-12-18T15:26:13.626-08:00Fund Stars PlummetI am always looking for evidence to support my belief that it is very difficult, probably impossible, to find mutual fund managers who will outperform their benchmark. It is not difficult to find managers who have beat the market in the past. That information is readily available through Morningstar.<br /><br />The investment industry and the financial media will often celebrate fund managers who have outperformed the market for an extended period. So, I found it noteworthy that The Oregonian identified five mutual fund managers who have come upon hard times. As of the December 6, 2011, the date of the article:<br /><br />Bruce Berkowitz was Morningstar's Domestic Fund Manager of the Year, 2009, and Stock Fund Manager of the Decade (2000-2009). His Fairholme Fund is down 29%. The Standard & Poor's 500 index is down 1%.<br /><br />Michael Hasenstab was the Morningstar Fixed Income Manager of the Year in 2010. His Templeton Global Bond fund has lost 2.4% this year. <br /><br />Bill Gross was the Morningstar Fixed Income Manager of the Decade (2000-2009). Gross runs the largest mutual fund in the world, the Pimco Total Return fund. The fund has gained 2% this year, but trails 91% of its peers.<br /><br />David Herro was Morningstar's the International Stock Fund Manger of the Decade (2000-2009). His Oakmark International fund is down nearly 13% this year and is in the bottom 25% of its category.<br /><br />Even the most accomplished fund investors can get derailed. Most eventually do.Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-13725821714369241652011-12-07T08:53:00.000-08:002011-12-07T09:00:27.687-08:00The Financial Truth<p class="MsoNormal">Today marks the 70th anniversary of the bombing of Pearl Harbor. It was a day that, as President Roosevelt said, would live in infamy. The attack drew the United States into World War II. The war brought out the best in this country. We were galvanized, emboldened and determined to preserve the values upon which this nation was founded.</p> <p class="MsoNormal">We are facing yet another great challenge, although not one that will be fought in battle fields, in the skies or on the seas. It is a struggle in which the majority of Americans are finding themselves in trouble financially. Some are in truly desperate financial straits. This short video conveys the seriousness of the matter more powerfully than I can.</p> <p class="MsoNormal"><a href="http://www.youtube.com/watch?v=b5Ip7niZCGA">Financial Truth</a> </p> <p class="MsoNormal">Please watch it and then encourage those around you to save more, spend less and borrow less.</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-1937922677253906032011-11-24T16:06:00.000-08:002011-11-24T16:12:45.020-08:0090, the new 70<p class="MsoNormal">I read recently that, according to the Census Bureau and the National Institute of Aging, the number of people in the US who are age 90 or older has nearly tripled since 1980. This is pretty remarkable. At the turn of the last century, life expectancy in this country was 47 years. While that figure is skewed by much higher infant mortality, people were living much shorter lives than they are today.</p> <p class="MsoNormal">Keep in mind that life expectancy is the average. Half of the people will reach that age. The other half won't make it. If you are in good health, eat well, exercise and avoid smoking and heavy drinking, you are likely to live beyond life expectancy.</p> <p class="MsoNormal">If you are curious about how long you will live, you might try the calculator at <a href="http://www.livingto100.com/">Living to 100</a> http://www.livingto100.com/. I did and I learned that I better plan to live to 100. (All of my grandparents lived to age 90. One lived to 95 and another lived to 98. So, I have a decent shot at making 100.)</p> <p class="MsoNormal">When I give clients a retirement planning questionnaire, they often put down an age for life expectancy that they relate to their parents and/or grandparents. The problem is that they are likely to live longer than the generations that preceded them.</p> <p class="MsoNormal">A good financial planner will model at least 5-10 years beyond current life expectancy. If the your goal is to live comfortably for as long as you live (i.e. to not run out of money), then you should make sure you have a safety margin for those extra years. </p> <p class="MsoNormal">Happy Thanksgiving!</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-19101376338544860772011-11-10T11:40:00.000-08:002011-11-10T11:45:10.381-08:00This Time is Different<p class="MsoNormal">If you are interested in placing the current global economic crisis in perspective, I recommend reading <u>This Time is Differen</u>t by Ken Roggoff and Carmen Reinhart. I read it while I was in Nepal and it helped me understand the history of these crises. We've been careening from crisis to crisis for literally hundreds of years. The current crisis is rather acute and we will not emerge from it any time soon.</p> <p class="MsoNormal">I watched the republican presidential debate last night. I was not inspired. I would really like to see our leaders, in both parties, begin having a candid conversation with the American people about how we can solve our economic problems ... unemployment, national debt, budget deficit. </p> <p class="MsoNormal">The solution is really pretty straightforward. But it is not easy and not appealing. So, no one really wants to talk about it. The solution is really pretty straightforward. But it is not easy and not appealing. So, no one really wants to talk about it. I'm sure they calculate that, if they tell us the truth, they won't stand a chance of getting elected. </p><p class="MsoNormal">Here's what has to happen:</p><p class="MsoNormal" style="text-indent: -24px;"></p><p class="MsoListParagraphCxSpFirst" style="text-indent:-.25in;mso-list:l0 level1 lfo1"><!--[if !supportLists]-->1.<span style="font:7.0pt "Times New Roman""> </span><!--[endif]-->We need reduce our expenses AND</p> <p class="MsoListParagraphCxSpMiddle" style="text-indent:-.25in;mso-list:l0 level1 lfo1"><!--[if !supportLists]-->2.<span style="font:7.0pt "Times New Roman""> </span><!--[endif]-->We need to increase our revenue.</p> <p class="MsoListParagraphCxSpLast" style="text-indent:-.25in;mso-list:l0 level1 lfo1"><!--[if !supportLists]-->3.<span style="font:7.0pt "Times New Roman""> </span><!--[endif]-->We may need to sell some of our assets to pay down our debt</p><p></p> <p class="MsoNormal">Simple. This is what I advise clients to do if they are struggling with debt or negative cash flow. Our government is no different. </p> <p class="MsoNormal">By the way, the title of the book is a tease. This time is not different.</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-18979318433017080782011-11-02T11:25:00.000-07:002011-11-02T11:27:06.936-07:00Confidence has its Limits<p class="MsoNormal">A prospective client sent me an article that ran in The New York Times on October 19, 2011.</p> <p class="MsoNormal">It was written by Daniel Kahneman who is an emeritus professor at Princeton and winner of the 2002 Nobel Prize in Economics. He is a leader in the area of behavior economics.</p> <p class="MsoNormal">The article, <a href="http://www.nytimes.com/2011/10/23/magazine/dont-blink-the-hazards-of-confidence.html?pagewanted=1&_r=1&emc=eta1">"Don't Blink! The Hazards of Confidence"</a> is quite interesting. </p> <p class="MsoNormal">Investors who believe they are able to beat the market would benefit from considering Kahneman's message.</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-89498502190842929722011-10-30T14:53:00.000-07:002011-10-30T14:58:04.253-07:00Mutual Fund Fees<p class="MsoNormal">I have been either very busy serving clients or out of the country for the past several weeks. So, for those of you who read my blog, that explains my absence.</p> <p class="MsoNormal">I read an article in this weekend's Wall Street Journal titled, "Why Fund Fees Barely Budge." You can find it here: http://online.wsj.com/article/SB10001424052970203911804576651512398417294.html?KEYWORDS=fund+fees</p> <p class="MsoNormal">The article notes that actively managed mutual funds charge an average expense ratio of 1.45%. In contrast, my firm's model portfolios have an expense ratio that averages about 0.25%.</p> <p class="MsoNormal">But this is not the only expense incurred by mutual fund investors. Funds pay brokerage expenses and bid-ask spreads when they buy and sell for the fund. The article notes that actively managed mutual funds incur an average of 1.44% of trading costs annually.</p> <p class="MsoNormal">Investors should keep these expenses in mind when they think about investing in actively managed funds. The active fund manager has to generate returns in excess of these fees in order for investors to experience returns that are better than the market itself.</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-57048602270508189242011-09-04T11:30:00.001-07:002011-09-04T11:30:51.376-07:00Yet Another Reason to Invest Internationally<p class="MsoNormal">Do you know what percent of the global stock market is comprised of companies based in the United States?<span> </span>Depending on the data you review, it somewhere between 35% and 40%.<span> </span>How much of your portfolio is made up of US stocks?<span> </span>I would anticipate that it's in excess of 50%.</p> <p class="MsoNormal">Most investors are prone to domestic bias.<span> </span>This means that the percent of stocks they own is over weighted to their home country.<span> </span>If you live in Japan, you are tilted toward Japanese stocks.<span> </span>If you live in Germany, you own more German stocks.<span> </span>If you live in the United States, you own more American stocks.</p> <p class="MsoNormal">Investors who want to own stocks based on global market capitalization should own no more than 35%-40% of stocks based in the U.S.<span> </span></p> <p class="MsoNormal">The Federal Reserve Bank of San Francisco has given investors a compelling reason to diversify away from U.S. stocks.<span> </span>Fed adviser Zheng Liu and researcher Mark Spiegel suggest in a recent paper that aging baby boomer will dampen U.S. stock values for the next few decades as they sell their investments to finance retirement. (Source: Bloomberg New)</p> <p class="MsoNormal">“U.S. equity values have been closely related to demographic trends in the past half century.<span> </span>In the context of the impending retirement of baby boomers over the next two decades, this correlation portends poorly for equity values.”</p> <p class="MsoNormal">So, consider shifting the equity portion of your portfolio away from U.S. stocks to international stocks.</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-55775066660450327162011-08-17T10:03:00.000-07:002011-08-17T10:09:21.344-07:00The Mutual Fund Industry Wealth Transfer<p class="MsoNormal">David Swensen, the chief investment officer at Yale University and the author of "Unconventional Success: A Fundamental Approach to Personal Investment," wrote an opinion piece on the mutual fund industry that appeared in The New York Times over the weekend. <span> </span>It's quite an indictment of an industry that offers products that are used by millions of investors.</p> <p class="MsoNormal">In the article Swensen makes several important points:</p> <p class="MsoNormal"></p><ul><li>The mutual fund industry has failed to deliver on its promises of market beating returns.<span> </span>Very few actively managed funds outperform the market itself.</li><li>Mutual funds are for-profit enterprises which means that there is an inherent conflict between their incentive to generate revenue and the investors desire to earn returns.Virtually every dollar earned by a mutual fund comes directly from its shareholders.<span> </span>This is a zero sum game.</li><li>Investors are lured into buying funds that have achieved high praise by mutual fund industry monitors such as Morningstar and Lipper. <span> </span>Unfortunately, such recognition is for historical results.<span> </span>It has nothing to do with what the fund will do in the future.<span> </span>Academic research tells that those funds that have performed well in the past may well underperform in the future.<span> </span>The phenomenon is known as "reversion to the mean."</li><li>Investors are prone to investing in hot funds only to find that they soon lag their peers.<span> </span>Many investors grow disillusioned, sell the once stellar fund and move on to the next hot fund.<span> </span>It turns out that funds often experience cycles of both superior and inferior performance.<span> </span>They follow each other (imagine the sine curve).<span> </span>Investors buy high and sell low and thus lock in results that are actually far worse than the funds they own.<span> </span>Dalbar has provided research on this for many years.<span> </span>It tells us that mutual fund investors do not come close to earning market returns. It also tells us that investors keep their funds for just over 3 years.<span> </span>Hardly a long term strategy.</li><li>Swensen tells us to "invest in a well-diversified portfolio of low-cost index funds."<span> </span>He points out that if investors had held their funds for 10 years, their results would have improved by 1.6% per year.<span> </span>This is a dramatic improvement in an industry that measures performance in basis points. (There are 100 basis points in one percent.)</li><li>Swensen also calls on the Securities and Exchange Commission to do more to regulate the mutual fund industry and protect investors.</li></ul><p></p> <p class="MsoNormal">Here's the link to the article:</p><p class="MsoNormal"><a href="http://www.nytimes.com/2011/08/14/opinion/sunday/the-mutual-fund-merry-go-round.html?_r=2&src=recg&pagewanted=all">The Mutual Fund Merry-G0-Round</a></p> <p class="MsoNormal">I encourage you to read the article.<span> </span>I suspect those who do will find the case for Intelligent Investing - low-cost, passive investing - even more compelling.</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-27921115664878176472011-08-09T10:16:00.000-07:002011-08-09T15:41:13.423-07:00<p class="MsoNoSpacing">Yesterday financial markets across the globe reacted negatively today to Standard & Poor's downgrade of long term debt issued by the United States.<span style="mso-spacerun:yes"> </span>Last Friday S&P lowered the rated from AAA to AA+ noting that the recent budget agreement failed to address the government's debt situation.<span style="mso-spacerun:yes"> </span>Asian markets opened down and were followed by markets in Europe and the United States.</p> <p class="MsoNoSpacing">Despite the unprecedented downgrade, the United States is far from alone in its need to address its excessive national debt levels.<span style="mso-spacerun:yes"> </span>The European Union has several members, including Ireland, Greece, Portugal, Italy and Spain that are struggling with debt levels that are unhealthy relative to the size of their economies.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNoSpacing">To some extent today's stock market's reaction reflects investors' dissatisfaction with the general state of the US economy.<span style="mso-spacerun:yes"> </span>The nation is burdened with an unsustainably large debt and its elected leaders have not demonstrated an ability craft an agreement that will result in a long term solution to the problem.<span style="mso-spacerun:yes"> </span>At the same time, economic growth is waning, unemployment remains persistently high, and inflation is creeping into the broader economy.</p> <p class="MsoNoSpacing">The stock market is a place in which investors sometimes overreact to news out of fear, panic, and desperation. <span style="mso-spacerun:yes"> Yesterday was </span>a good example.<span style="mso-spacerun:yes"> </span>The broad market, measured by the Standard & Poor's 500 index, dropped by over 6%.<span style="mso-spacerun:yes"> </span>Does that mean that the stocks which comprise this index were suddenly worth less than they were last Friday?<span style="mso-spacerun:yes"> </span>No.<span style="mso-spacerun:yes"> </span>It means that sellers overran buyers and drove the prices of these large companies down.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNoSpacing">Cascade Wealth Management remains committed to the time-tested long term strategies of proper asset allocation, diversification and maintaining low costs.<span style="mso-spacerun:yes"> </span>Our clients' portfolios, while down over the past few weeks, have not suffered the temporary losses that the selloff in the U.S. stock market would imply.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNoSpacing">What should investors do in the midst of all of this volatility?<span style="mso-spacerun:yes"> </span>I would suggest following the advice of Burton G. Malkiel in his opinion piece in yesterday's Wall Street Journal, "<a href="http://online.wsj.com/article/SB10001424053111903366504576492512709525754.html?KEYWORDS=don%27t+panic">Don't Panic About the Stock Market.</a>"<span style="mso-spacerun:yes"> </span>Malkiel, professor emeritus of economics at Princeton University is co-author of <u>The Elements of Investing</u>, a book I highly recommend.<span style="mso-spacerun:yes"> </span>He encourages the investors to "stay the course."<span style="mso-spacerun:yes"> </span>So do I.</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-19835866554453977832011-08-04T15:56:00.000-07:002011-08-04T15:59:30.122-07:00<p class="MsoNormal">Today the global financial markets dropped rather dramatically.<span style="mso-spacerun:yes"> </span>The Dow Jones Industrial Average fell by 513 points.<span style="mso-spacerun:yes"> </span>The Standard & Poor's 500 index was down 4.8%</p> <p class="MsoNormal">I received the following email from another investment advisory firm:</p> <p class="MsoNormal"><span style="color:red">"The financial markets have been experiencing considerable volatility in the last two weeks. We have made changes to our models because we believed this could happen. We are continuing to monitor your portfolios in light of the recent economic and political events and believe the strategy we put in place is appropriate. We will continue to provide you with updates as we study the information available to us."<o:p></o:p></span></p> <p class="MsoNormal">They believed this could happen?<span style="mso-spacerun:yes"> </span>Well, we all know this could happen.<span style="mso-spacerun:yes"> </span>Moreover, it happens with some regularity over the long cycles of the stock market.</p><p class="MsoNormal">The strategy we put in place is appropriate?<span style="mso-spacerun:yes"> </span>I'd love to know what that strategy is.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNormal">Let's not forget the following:</p><p class="MsoNormal"></p><p class="MsoListParagraphCxSpFirst"></p><ol><li>The financial markets are prone to volatility.<span style="mso-spacerun:yes"> </span>This has been the case for 200 years in this country.</li><li>No one knows what will happen tomorrow, next week or next year in the stock market.<span style="mso-spacerun:yes"> </span>If someone tells you they know what is going to occur in the stock market, run in the opposite direction.</li><li>The stock market generally prices securities in an efficient manner.<span style="mso-spacerun:yes"> </span>This means that identify mispriced securities is very difficult.<span style="mso-spacerun:yes"> </span></li><li>Given that the stock market is an efficient marketplace, waste no time trying to find the underpriced or overpriced security.<span style="mso-spacerun:yes"> </span>Instead build a well allocated and properly diversified portfolio.</li><li>In times of market volatility, manage your emotions and not your portfolio.</li></ol><div><br /></div><p></p> <p></p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-77413801918373526782011-08-03T15:56:00.000-07:002011-08-03T15:57:20.579-07:00Variable Annuities - Expenses Drag Performance<p class="MsoNormal">With the economy weakening and the stock market faltering, investors are moving out of the stock market and seeking refuge inside annuities.<span style="mso-spacerun:yes"> </span><span style="mso-spacerun:yes"> </span>Morningstar reports that investors withdrew $50 billion from stock mutual funds in the 12 months through April of this year.<span style="mso-spacerun:yes"> </span>LIMRA reported that sales of variable annuities in the United States increased to $39.8 billion in the first quarter compared to $32.2 billion in the same period in 2010.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNormal">The problem is that investors generally have no idea how much they are paying for these insurance products.<span style="mso-spacerun:yes"> </span>According to Morningstar the average fees for variable annuities are 2.51%.<span style="mso-spacerun:yes"> </span>Many buy a rider that offers guaranteed minimum payments.<span style="mso-spacerun:yes"> </span>These riders cost 1.03% on average.<span style="mso-spacerun:yes"> </span>So, investors who buy these products can end up paying more than 3.5% in expenses.</p> <p class="MsoNormal">These expenses are a significant drag on the performance of variable annuities.<span style="mso-spacerun:yes"> </span>If the sub accounts inside the annuity earned an average of 8%, the return after fees would be 5.5%.<span style="mso-spacerun:yes"> </span>In addition, income received from an annuity is taxed as ordinary income.</p> <p class="MsoNormal">Some investors would benefit from including a variable annuity in their portfolios.<span style="mso-spacerun:yes"> </span>But the fees make them unattractive investments for most investors.</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com1tag:blogger.com,1999:blog-2141709464719439032.post-20125336839106323282011-07-26T14:45:00.000-07:002011-07-26T14:48:03.813-07:00The Debt Ceiling<p style="margin:0in;margin-bottom:.0001pt"><span class="Apple-style-span" ></span></p><p style="margin-bottom:0in;margin-bottom:.0001pt"></p><p style="margin-bottom:0in;margin-bottom:.0001pt"><span class="Apple-style-span" >Several clients have contacted me in the past few weeks expressing concern about the approaching deadline to raise the nation's debt limit. </span></p><span class="Apple-style-span" > <p style="margin-bottom:0in;margin-bottom:.0001pt"><span face="Calibri">The Treasury Department has indicated the limit must be increased by next Tuesday, August 2, or the country may default on its obligations. Unfortunately, as of today, with one week to go, our elected leaders have still not been able to craft an agreement that will increase the debt limit.</span></p> <p style="margin-bottom:0in;margin-bottom:.0001pt"><span face="Calibri">Analysts have been speculating about the impact a default could have on the financial markets. No one really knows, because the United States has never defaulted. But clearly the effect would be negative and perhaps severely so.</span></p> <p style="margin-bottom:0in;margin-bottom:.0001pt"><span face="Calibri">I would not be surprised if the stock and bonds markets both dropped fairly dramatically, if it were to become clear that Congress and the Obama administration will not reach a deal. </span></p> <p style="margin-bottom:0in;margin-bottom:.0001pt"><span face="Calibri">However, as has been the case with our other events that have shaken the market -- remember when the markets opened after the September 11, 2001 attacks or when Congress voted down the Troubled Asset Relief Program in September of 2008? -- I expect the markets would recover and in a relatively short period of time.</span></p> <p style="margin-bottom:0in;margin-bottom:.0001pt"><span face="Calibri">I have read that some investors have decided to get out of the markets until this situation clears up. This approach assumes that we will actually know when things are stable again and when it's safe to re-enter the market. I know I do not have the ability to see into the future.</span></p> <p style="margin-bottom:0in;margin-bottom:.0001pt"><span face="Calibri">Moreover, the nation's financial predicament involves much more than another increase in its debt ceiling. (There have been 74 increases since March of 1962.) The government spends considerably more than it receives in revenue. We have a national debt that is nearing the total annual productivity of the country and, if not soon addressed, will simply dominate the nation's budget. Congress and the administration have to address this imbalance or the nation will be facing the kind of austerity measures that are currently being implemented throughout the Europe Union.</span></p> <p style="margin-bottom:0in;margin-bottom:.0001pt"><span face="Calibri">I have recently read three books on the history of crashes and depressions in financial markets. I was struck by how often these events occur and by how quickly the markets recover. While we cannot predict market events, we know they will occur and we know that eventually the markets heal.</span></p> <p style="margin-bottom:0in;margin-bottom:.0001pt"><span face="Calibri">Intelligent, long term investors need to remain disciplined and resolute in the face of these events. I realize this is not particularly comforting. But I know there is no better approach.</span></p><p></p></span><p></p> <span ></span>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-87219853046521515922011-07-15T16:33:00.000-07:002011-07-15T16:39:50.098-07:00Dimensional Fund Advisors<p class="MsoNormal"></p><p class="MsoNormal">My blog seems like a good place to announce that Cascade Wealth Management will begin offering funds from Dimensional Fund Advisors in the very near future.<span style="mso-spacerun:yes"> </span>I am very excited about this, as I believe DFA offers funds built on the finest academic research in the investment community.</p> <p class="MsoNormal">DFA Funds are not directly available to retail investors.<span style="mso-spacerun:yes"> </span>Investors can access them through a Registered Investment Advisor (e.g. CWM) which has been authorized by DFA to offer their funds.</p> <p class="MsoNormal">DFA has several key principles:</p> <p class="MsoNormal">Markets Work. <span style="mso-spacerun:yes"> </span>DFA believes that the Efficient Markets Hypothesis (EMH) is valid. The EMH suggests that securities are generally properly priced and that it is very difficult, essentially impossible, to consistently identify securities that are mispriced.<span style="mso-spacerun:yes"> </span>Consequently, it is misguided to attempt to outperform the overall market through active management strategies such as individual security selection and timing strategies.</p> <p class="MsoNormal">Risk and Return are Related.<span style="mso-spacerun:yes"> </span>The idea is that investors are rewarded for taking risk.<span style="mso-spacerun:yes"> </span>The amount of the reward (i.e. return) is directly related to the amount of risk. <span style="mso-spacerun:yes"> </span>However, the founders of DFA, Eugene Fama and Kenneth French, have developed a multifactor model which is the basis for DFA funds.<span style="mso-spacerun:yes"> </span>I will come back to this model in a future blog.</p> <p class="MsoNormal">Diversification is Essential.<span style="mso-spacerun:yes"> </span>Portfolios should be structured to provide comprehensive diversification within and across global asset classes.<span style="mso-spacerun:yes"> </span>Portfolio risk is composed of diversifiable or non-systematic risk and non-diversifiable, systematic or market risk (all interchangeable terms).<span style="mso-spacerun:yes"> </span>Investors are only compensated for taking market risk.<span style="mso-spacerun:yes"> </span>Investors must diversify sufficiently to eliminate non-systematic risk.</p> <p class="MsoNormal">Structure Determines Performance.<span style="mso-spacerun:yes"> </span>Asset allocation explains most of the variation of portfolio returns. <span style="mso-spacerun:yes"> </span>DFA posits that over 96% of the variation in return is due to risk factor exposure.<span style="mso-spacerun:yes"> </span>Thus, investors must get asset allocation right in order to be successful.</p> <p class="MsoNormal">Look for more information about DFA funds in subsequent postings.</p><p></p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-79028976729355519912011-07-06T15:23:00.000-07:002011-07-06T15:30:58.611-07:00So what are you?<p class="MsoNormal">I thought I might offer my take on the differences between savers, investors, speculators and gamblers.</p> <p class="MsoNormal"><b style="mso-bidi-font-weight:normal">Saver: </b><span style="mso-spacerun:yes"> </span>A saver is someone who consistently sets aside some portion of her income for use in the future.<span style="mso-spacerun:yes"> </span>The saver delays the gratification that comes from spending today and instead reduces current consumption below what her total income would allow her to spend.</p> <p class="MsoNormal">The saver puts the money that is not spent in some kind of an account that will be secure and grow modestly in value.<span style="mso-spacerun:yes"> </span>The saver's primary objective is to preserve the monies saved.<span style="mso-spacerun:yes"> </span>Therefore, she will likely put her funds in an account that is guaranteed by the federal government.<span style="mso-spacerun:yes"> </span>The money might be invested in a bank product like a savings account, interest-bearing checking account, a bank money market account or a certificate of deposit.<span style="mso-spacerun:yes"> </span>All of these bank products are eligible for Federal Deposit Insurance (FDIC) up to a legal limit of $250,000.</p> <p class="MsoNormal">The smart saver will seek to put enough into "safe" investments, so that emergencies can be met from these funds.<span style="mso-spacerun:yes"> </span>A rough rule of thumb suggests that three to six times monthly expenses should be set aside in an emergency fund.<span style="mso-spacerun:yes"> </span>The saver can tap this fund if her car needs repairs, an appliance must be replaced, or to get through a brief period of unemployment.</p> <p class="MsoNormal"><b style="mso-bidi-font-weight:normal">Investor:</b> An investor is someone who is willing to accept investment risk with the expectation of receiving a return proportionate to the risk.<span style="mso-spacerun:yes"> </span>The greater the risk of loss of principal, the greater the expected return.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNormal">Savers become investors once their emergency funds are fully funded.<span style="mso-spacerun:yes"> </span>Savers should not "invest" funds that belong in their emergency funds.<span style="mso-spacerun:yes"> </span>However, once the emergency fund has been fully funded, the investor should become an investor as well.</p> <p class="MsoNormal">The investor will consider a wide universe of investments such as individual securities (e.g. stocks and bonds), mutual funds, exchange traded funds, limited partnerships or investment trusts.<span style="mso-spacerun:yes"> </span>In fact, there are many kinds of investment that may appeal to the investor.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNormal"><b style="mso-bidi-font-weight:normal">Speculator:</b><span style="mso-spacerun:yes"> </span>A speculator is someone who is willing to accept a very high level of risk with the hope that she will be rewarded with a very high return.<span style="mso-spacerun:yes"> </span>The speculator accepts a very high probability that she may lose some, or all, of her investment.<span style="mso-spacerun:yes"> </span>The risk of loss with speculation is greater than it is with investing.</p> <p class="MsoNormal">There are many ways to speculate.<span style="mso-spacerun:yes"> </span>One can purchase an interest in a wildcat oil exploration project, raw land subject to future development, a start-up company with no revenue and in many other ventures.<span style="mso-spacerun:yes"> </span>The speculator reviews information related to an opportunity that requires funds, evaluates the risks and potential returns and decides to participate or not based on her own assessment</p> <p class="MsoNormal"><b style="mso-bidi-font-weight:normal">Gambler:</b><span style="mso-spacerun:yes"> </span>A gambler is a different kind of risk taker.<span style="mso-spacerun:yes"> </span>The gambler has no ability to assess risk.<span style="mso-spacerun:yes"> </span>He is willing to part with money for the hope that he may receive a large sum in return.<span style="mso-spacerun:yes"> </span>Gambling is based on random outcomes and, as a result, the gambler has no influence over the outcome.<span style="mso-spacerun:yes"> </span>People who part with their money in casinos are gamblers.</p> <p class="MsoNormal">Gamblers seem to gain satisfaction from entertaining the possibility that they may receive a large "reward" for participating in the gamble.</p> <p class="MsoNormal">So, what are you?</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-51792721686323428522011-07-01T17:04:00.000-07:002011-07-01T17:19:24.486-07:00GAO's Advice for Retirees<p class="MsoNormal">The General Accounting Office (GAO) released (June 2011) a study "Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices."<span style="mso-spacerun:yes"> </span>I read the key findings and scanned the study.<span style="mso-spacerun:yes"> </span>Here's what the GAO has to say to those approaching retirement.</p> <p class="MsoNormal">Consider delaying the receipt of Social Security benefits until reaching at least full retirement age.<span style="mso-spacerun:yes"> </span>The Social Security Administration permits recipients to start payments as early as age 62.<span style="mso-spacerun:yes"> </span>Many Americans begin receiving benefits at this age.<span style="mso-spacerun:yes"> </span>However, their payments would be higher by waiting to full retirement.<span style="mso-spacerun:yes"> </span>Nearly three quarters of current beneficiaries took payouts before age 65.<span style="mso-spacerun:yes"> </span>Those who wait to age 70 increase their benefits 32% compared to taking them at age 66.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNormal">Waiting to start Social Security has other benefits.<span style="mso-spacerun:yes"> </span>The applicant continues to work and, hopefully, save.<span style="mso-spacerun:yes"> </span>The period of retirement is reduced and, as a result, so is the amount of money required to fund living expenses during retirement.</p> <p class="MsoNormal">The study suggests retirees may take withdrawals from their retirement savings at a rate of 3%-6%. <span style="mso-spacerun:yes"> </span>This is a pretty widely accepted rule of them in the financial planning community.</p> <p class="MsoNormal">For many this draw down rate will not produce sufficient income.<span style="mso-spacerun:yes"> </span>The GAO suggests retirees consider the purchase of an immediate annuity which guarantees income for the life of the annuitant.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNormal">I find fee only advisors reluctant to suggest clients consider using annuities to fund retirement.<span style="mso-spacerun:yes"> </span>Fee only advisors (and their clients) find annuities overly complex and expensive.<span style="mso-spacerun:yes"> </span>They are often reluctant to have their clients transfer assets they may be managing to an insurance company.<span style="mso-spacerun:yes"> </span>Further, the rates credited by insurance companies to annuities are quite low in the current investment environment rendering the effective return on annuities uninspiring. </p> <p class="MsoNormal">I believe there is a place for an immediate annuity in many retirement plans.<span style="mso-spacerun:yes"> </span>When I include immediate annuities in client retirement models, I see the model's performance improve.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNormal">The GAO study warns that many Americans are in jeopardy of living in poverty in retirement.<span style="mso-spacerun:yes"> </span>The office calls for greater financial literacy and making annuities available in defined contribution retirement plans (e.g. 401(k) or 403(b)).</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-12483713918591890942011-06-23T10:56:00.000-07:002011-06-23T10:58:51.185-07:00Investors have Lousy Timing<p class="MsoNormal"><o:p> T</o:p>he June/July issue of Morningstar Advisor (a trade publication for independent advisors) contains an article about how poorly investors time their purchases of mutual funds.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNormal">The article points out that, through most of 2009 and 2010, investors moved money from equity funds to bonds.<span style="mso-spacerun:yes"> </span>The problem is that the stock market hit a low in March of 2009 and then proceeded to mount a rather aggressive recovery.</p> <p class="MsoNormal">Investors who were moving from stocks to bond were heading in the wrong direction.<span style="mso-spacerun:yes"> </span>They sold stocks when the market was low and moved into bonds after the bond market's very long rally.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNormal">Why do investors do this?<span style="mso-spacerun:yes"> </span>Because they are driven by emotion.<span style="mso-spacerun:yes"> </span>In the depths of the economic crisis, investors were panicked and fearful.<span style="mso-spacerun:yes"> </span>What do people do when they feel this way?<span style="mso-spacerun:yes"> </span>They run away.<span style="mso-spacerun:yes"> </span>This reaction is instinctual.<span style="mso-spacerun:yes"> </span>Taking flight is a helpful and appropriate reaction if you are being chased by a saber tooth tiger.<span style="mso-spacerun:yes"> </span>In fact, it could save your life.<span style="mso-spacerun:yes"> </span>It is not helpful if you are a <span style="mso-spacerun:yes"> </span>long term investor trying to grow your wealth.</p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-91713286329560864772011-06-14T14:48:00.000-07:002011-06-14T16:40:20.835-07:00Stock Pickers Beaten Badly<p class="MsoNoSpacing">Three of the most highly regarded fund managers have recently lagged behind their peers and the market itself.</p> <p class="MsoNoSpacing"></p><p class="MsoNoSpacing">Investment News reports (<a href="http://www.investmentnews.com/article/20110613/FREE/110619986/-1/INDaily01&dailycount=2&issuedate=20110613">Berkowitz, Heebner and Miller in tight battle — for last place</a>) that Bruce Berkowitz, Kenneth Heebner and Bill Miller have posted results are all well behind the Standard & Poor's Index through June 9, 2011.</p><p></p> <p class="MsoNoSpacing">Mr. Berkowitz was Morningstar's fun manager of the decade.<span style="mso-spacerun:yes"> </span>Mr. Miller beat the S&P 500 index 15 straight years through 2005.<span style="mso-spacerun:yes"> </span>Mr. Heebner was manager of the best-performing diversified US stock fund over a 10-year period.</p> <p class="MsoNoSpacing">Here's the scorecard:</p><p class="MsoNoSpacing"></p><p class="MsoNoSpacing"><u>Manager<span style="mso-tab-count:2"> - </span><span style="mso-tab-count:1"></span>Fund<span style="mso-tab-count: 6"> - </span>Return<o:p></o:p></u></p> <p class="MsoNoSpacing">Bruce Berkowitz<span style="mso-tab-count:2"> - </span>Fairholme Fund <span style="mso-tab-count:2"> </span><span style="mso-tab-count:2"> </span>- 12%</p> <p class="MsoNoSpacing">Kenneth Heebner<span style="mso-tab-count:2"> - </span>CGM Focus Fund<span style="mso-tab-count:2"> </span><span style="mso-tab-count:2"> </span>- 12%</p> <p class="MsoNoSpacing">Bill Miller<span style="mso-tab-count:3"> - </span>Legg Mason Capital Opportunity Fund<span style="mso-tab-count:2"> </span>- 11%</p> <p class="MsoNoSpacing"><span style="mso-tab-count:1"> </span><span style="mso-tab-count:3"> </span>S&P 500 Index<span style="mso-tab-count:5"> </span>+ 3.4%</p><p class="MsoNoSpacing"><span style="font-family: Calibri, sans-serif; "><span class="Apple-style-span" >Data source: Morningstar</span></span></p><p class="MsoNoSpacing">What can we learn from the fall of these stock picking stars?<span style="mso-spacerun:yes"> </span>We have more information that suggests that stock pickers are unable to beat the market indefinitely.<span style="mso-spacerun:yes"> </span>Certainly some managers beat the market. <span style="mso-spacerun:yes"> </span>We would expect some to beat the market and others to underperform the market.<span style="mso-spacerun:yes"> </span>The problem is differentiating one from the other.</p> <p class="MsoNoSpacing">Moreover, we do not know whether managers who beat the market do so because of skill or luck.<span style="mso-spacerun:yes"> </span>Certainly successful fund managers claim that their superior investing skills underlie their performance.<span style="mso-spacerun:yes"> </span>But we also routinely hear from underperforming managers that bad luck has derailed their funds.<span style="mso-spacerun:yes"> </span>So, is it skill or luck?</p> <p class="MsoNoSpacing">Some might suggest that the savvy investors should ride the stars as long as possible and then jump off when they start to falter.<span style="mso-spacerun:yes"> </span>There are three challenges that must the investor must overcome to pull this off. <span style="mso-spacerun:yes"> </span>First, the investor must be able to identify and invest with the stock picking star BEFORE he starts his winning streak. <span style="mso-spacerun:yes"> </span>Second, the investor must have the conviction to stay invested with the star if/when a more compelling investing opportunity appears.<span style="mso-spacerun:yes"> </span>Third, the investor must know when to fold 'em and move out of the fund BEFORE it becomes a losing fund.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNoSpacing">We know that investors are rarely able to move in and out of mutual funds successfully.<span style="mso-spacerun:yes"> </span>Dalbar's research shows that shareholders in mutual funds earn returns that are consistently lower than those of the funds in which they invest.<span style="mso-spacerun:yes"> </span></p> <p class="MsoNoSpacing">The lesson for intelligent investors:<span style="mso-spacerun:yes"> </span>Waste no time searching for the next hot fund manager.<span style="mso-spacerun:yes"> </span>Instead invest across asset classes and capture the returns of those asset classes using low cost, passive funds.</p><p></p>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0tag:blogger.com,1999:blog-2141709464719439032.post-48699597002139044452011-06-07T15:13:00.000-07:002011-06-07T15:21:11.568-07:00Investors Hunkered DownPrudential Financial recently conducted an online survey of investors, "The Next Chapter: Meeting Investment & Retirement Challenges."<br /><br /><a href="http://news.prudential.com/images/20026/2011TLConsumerStudyFINAL.pdf">http://news.prudential.com/images/20026/2011TLConsumerStudyFINAL.pdf</a><div><br />The study yielded some interesting data.<br /><ul><li>44% of the participants said they are not likely to ever put money in the stock market. </li></ul>This is rather alarming, because it means a substantial portion of Americans are forsaking the asset class (stocks) with the greatest long term returns when compared to bonds, real estate and cash instruments (CDs, bank accounts, money market accounts).<br /><br /><div><ul><li>61% believe the principles of investment diversification and asset allocation have changed. </li></ul>The principles of successful investing have not changed. We know that markets are fickle. Asset allocation and diversification cannot and do not provide a shield from extreme market volatility. However, over long periods, no other strategy provides better results.<br /><br /><ul><li>66% are concerned that they will miss out on the stock market recover based on their current portfolio mix. </li></ul>Many investors bailed out of equities at or near the bottom of the recent stock market swoon. Since March of 2009, the low point, the stock market is up well over 100%. Investors who were not properly invested in equities lost out on this opportunity. Moreover, the opportunity will not present itself again until we have yet another economic crisis.<br /><br /><ul><li>72% of Americans agree that they need to think differently about saving and planning for retirement. </li></ul>The economic crisis, stock market crash and housing collapse may yield some long term benefit, if Americans actually begin reducing personal debt and saving more. Very few Americans are on track for a financially secure retirement.<br /><br /><ul><li>69% believe few financial service firms are trustworthy. </li></ul>The banks, wire houses, insurance companies, and credit unions have largely failed investors. In general, they have not served their customers in a fiduciary capacity. They have not engaged their customers in comprehensive planning. Instead they have offered complex and confusing products that have essentially transferred billions of savings from investors to large financial institutions.<br /><br />Many Americans need to make a major change in their approach to retirement. If they do not, they run the risk of finding that the last decades of their lives will be something far less than golden. Among other findings, the Prudential survey suggests that the need for greater financial and investment literacy is great.<br /></div></div>Terry A. Donahe, CFPhttp://www.blogger.com/profile/17939289829415948277noreply@blogger.com0